The overview of the results of the survey provided shows that the focus and the rules applicable to tackle aggressive tax planning may have an influence on tax arbitrage. The survey also shows that countries dealt with international tax arbitrage differently. For instance, policy makers in Colombia and Brazil are introducing rules to tackle tax treaty shopping and conduit arrangements. In contrast, Uruguay and South Africa are regulating holding companies but with different objectives being to repeal the beneficial holding regime (Uruguay) and to introduce a preferential headquarter regime (South Africa). This paragraph will provide more in-depth information on the relationship between rules and forms of aggressive tax planning in Brazil, Colombia, Uruguay and South Africa.
Brazil stated that international tax arbitrage has not yet been directly addressed by the law maker. The attention of the tax administration is towards the use of special purpose vehicles (SPVs) and to the differentiation between formal holding companies and substantial holding companies. The tax administration has challenged the use of SPVs for instance in goodwill amortization stating that the use of SPVs in this case will have no other purpose than reducing taxation.64 The Brazilian report states that the Brazilian Revenue Service promoted challenges against taxpayers that engaged such tax planning, based on the assumption that those SPVs do not have any purpose other than reducing taxation. Unfortunately, however, the discussion currently held by the jurisprudence and scholarship does not furnish elements
63 Exchange of information and taxpayer rights such as right to notify, right to appeal and right of confidentiality, simultaneous and joint audits are some of the issues that will be discussed in other papers of the DeSTaT Research Project.
64 In particular, the Brazilian report states that the topic of holding companies is closely related to the use of special purpose vehicles (SPV) and goodwill amortization in Brazil. Indeed, the goodwill generated by the acquisition of equity interest may be offset against profits for purposes of determining the calculation basis of the corporate income tax so long as the holding company and the controlled company are merged one into the other.
Since in many cases such incorporation may take years to be possible from an operational perspective, many acquisitions have been made through SPVs which are immediately merged into the acquired company, thus enabling the use of the tax benefit.
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that can be consistent enough to indicate which approach will prevail and therefore, it can be argued that the approach of the tax administration lacks of transparency.
Furthermore, in Brazil a distinction is made between formal and substantial holding companies. A formal holding company only needs to comply with the commercial formalities of incorporation and does not require any staff, actual address (other than a mailbox), or any other substance requirement. In contrast, the substantial holding company requires a reasonable substance. The tax administration in Brazil is currently applying the substantial holding company definition in connection with the business purpose doctrine.
One problem in Brazil is that the interpretation of the anti-avoidance rules depends on the interpretation by the tax administration and the judiciary and that these interpretations may be different. For instance this is the case regarding the two contradictory decisions of the Administrative Tax Appeals Board (CARF65) regarding tax treatment of investment made through directly controlled foreign holding companies.66 In addition, Brazil has included rules to tackle treaty abuse such as beneficial ownership, limitation on benefits and main purpose test in the tax treaties concluded with Israel, Japan, Peru and Mexico amongst others.
Colombia does not have rules regarding holding companies, but the 2012 Tax Reform modified the definition of residence to target holding companies residing in low tax jurisdictions while being effectively managed from Colombia. As to foreign holding companies, Colombia will impose the corporate income tax if the company is effectively managed in Colombia, regardless of whether the company has an active business, employees, or if it assumes substantial risks. This has been heavily criticised in academic events, as the
65 CARF is the Court Responsible for maintaining or withdrawing the challenges before they reach the judiciary courts.
66 The structure addressed the tax treatment of investments made directly through controlled foreign holding companies (DCHC) in indirectly controlled companies resident in third countries (ICC). The issue was to determine how the profits and losses of the ICC should be taxed: after the consolidation of the results of all foreign investments in the DCHC, with the occasional applicability of the double tax treaty concluded by Brazil and the country of residence of the DCHC, or directly by the Brazilian company, regardless of the DCHC in between. At first, the Administrative Tax Appeals Board (CARF) reached the conclusion that the profits of the ICC should be directly considered for tax purposes by the Brazilian company, regardless of the DCHC. In other words, nor the consolidation of profits and losses would be possible, neither would the DTT- DCHC be applicable. This particular decision prevents the possibility of the use of conduit structures by Brazilian companies (Decision n. 101-97.070 of 17 December 2008). Nevertheless, later decisions of the CARF seem to reverse this position. Accordingly, the results of the ICC must be consolidated in the DCHC before being considered for purposes of Brazilian taxation. According to the speakers at the roundtable, this is the only position that suits the Brazilian legislation currently in force, since the speakers disagree of the legal basis used by the previous decision of the CARF to disregard the DCHC and directly tax the results of the ICC (Decision n.
1401-000.832 of 8 August 2012 and Decision n. 1101-000.811 not yet published).
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key entrepreneurial risk-taking functions approach is seen as more appropriate to attribute taxing powers.
The focus of Colombia has been on the abuse of tax treaties including the use of foreign holding or conduit companies. For that purpose, Colombia has introduced not only national anti-abuse rules but also rules to tackle treaty abuse such as beneficial ownership, limitation on benefits and main purpose test in for instance, the tax treaties concluded with Spain, Switzerland, Mexico and Canada amongst others.
Colombia-Spain tax treaty creates opportunities for conduit structures and treaty abuse by means of using the reduced withholding tax rate for dividends and the use of the Spanish holding companies that are exempted of taxation in Spain (i.e. ETVEs 67). Spain has a tax treaty with Colombia where minimum requirements (only beneficial owner) exist in respect of substance for dividends. For the application of this treaty, in Colombia withholding tax on dividends paid by Colombia to these Spanish entities i.e. ETVES will be reduced to 0% for substantial shareholding (i.e. 20%) or 5% in other cases. In Spain the ETVES will not be taxed on these dividends. The result is then lower or no taxation.68 It is submitted that the Colombian tax administration has become very critical of the tax treaty between Spain and Colombia and is searching ways to renegotiate the treaty and to introduce the limitation on benefits clause to address the issue of substance. The reporter of Colombia stated that the tax administration has unofficially expressed the intention to control the use of conduit companies with the application of the domestic anti-abuse provisions.
The tendency of Colombia is to introduce more anti-abuse provisions in its tax treaties and to apply the domestic anti-abuse rules to tax treaty situations. This may result in treaty override in the case that the treaty does not allow such anti-abuse provisions to be applicable in treaty situations.69 It is submitted that treaty override brings more uncertainty to the taxpayers since in addition to the tax treaty anti-abuse provisions, domestic rules (including
67 In 1996, a special regime governing Spanish Holding Companies was introduced. By means of this regime, the Spanish Holding Companies i.e. ETVES “Entidades de Tenencia de Valores Extranjeros” (“ETVE”) may be fully exempt from the payment of tax on dividends and capital gains obtained from their shareholding in non-resident companies. In addition, in 2010 by means of a binding ruling of the Spanish tax authorities, ETVES may make distributions to its foreign resident shareholders free of Spanish withholding tax upon certain conditions.
68 J.E. Sanín Gómez, Tax Planning with ETVES and Tax Evasion, Portafolio of 25 November 2011. See http://www.portafolio.co/opinion/blogs/juridica/planeacion-fiscal-internacional-etves-y-las-clausulas-anti-elusion (Last visited November 2014)
69 The override doctrine applicable to bilateral tax conventions results in a bilateral tax convention having equal force as domestic law and thus the most recent prevails. The result is that a conflict between a bilateral tax convention and a domestic law is solved by applying the provision introduced later in time.
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tax administration rules and case law) regulating abuse of law or substance over form will be also decisive to determine whether a transaction is disregarded or not for tax purposes.
Furthermore, it should be kept in mind that since the 2012 reform is still (November 2014) in the process of being implemented70, it is still too early to determine whether this approach of Colombia will also result in rules regarding holding companies and international tax arbitrage.
The Colombian reporter confirmed that the government has shown public concern for the use government has shown public concern for the use of aggressive tax planning schemes and structures that allow Colombian taxpayers to erode the national base and shift the profits to jurisdictions where they will remain untaxed or taxed at lower rates71. However, there is low awareness in the tax administration of the specific practices that involve taking advantage of legislative mismatches in different jurisdictions.72
Uruguay repealed in 2006 the regime for the Financial Investment Companies which was criticised due to the favourable tax regime and the purpose of holding companies making use of the regime to carry on offshore activities. As of 1 January 2011, all companies are subject to the provisions of the general tax regime and to the provisions of the Law on Commercial Companies.
Furthermore, Uruguay introduced in 2010 Controlled Foreign Company Regulations.
In principle, Uruguay applies the principle of source. However, in case of unearned income obtained by taxpayers as from January 2011, the principle of residence is applicable i.e.
residents of Uruguay are taxed on their income. These rules apply if one resident individual is owner of any share of the foreign entity.73 According to the reporter of Uruguay, the structural elements of the CFC rules are the following: (i) control upon the non-resident entity; (ii) privileged tax regime of the non-resident entity; (iii) nature of the income obtained by the non-resident entity.
70 In Colombia, once the Law enacting the Tax Reform enters into force, the Law will be subject to review by the Constitutional Court to test the compatibility of the Law with the Constitution. Furthermore, regulations of the tax administration will be issued to implement the provisions of the reform. At the time of writing, the Constitutional review of the 2012 Tax Reform has already taken place but the tax administration is still issuing regulations to implement this Law for instance to define tax havens; transfer pricing; application of the substance over form and abuse of law provisions amongst others.
71 The motivation for the GAAR in the 2012 reform (art. 869 of the Colombian Tax Code) established that the Colombian government intended to “combat the most sophisticated abusive practices”(free translation).
72 Ibid.
73 The reporter of Uruguay states that in general CFC rules may apply as long as residents control the foreign company or have a significant participation in it either directly or indirectly or though related parties. However, in Uruguay, it is sufficient that the individual has shares in the foreign entity.
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South Africa has introduced specific rules to prevent tax arbitrage. The general anti-avoidance rules aim to prevent round trip financing arrangements. A further example is at the time of writing, and soon to be removed, exemption for South African source interest earned by non-residents. Up to 1 January 2015 non-residents have been exempted from tax on interest income from a South African source. This exemption does not apply if the non-resident is physically present in South Africa for more than 183 days (in the 12 months preceding the accrual) or if the non-resident has a permanent establishment in South Africa.
As from 1 January 2015 a withholding tax of 15% will apply subject to certain exemptions and subject to any DTC limitations.
In addition, tainted intellectual property can be regarded as royalties in South Africa.
The withholding tax on royalties will increase to 15% from 12%. A withholding tax is also to be introduced on management or technical fees. The reason for this is that these fees generate local deductions giving rise to base erosion. It is believed that these fees amount to billions per annum, much of which is shifted to low tax jurisdictions.74 These amendments introduce a uniform cross-border withholding regime to prevent base erosion. In addition South Africa has had other anti-abuse rules such as Controlled Foreign Company Regulations and thin-capitalization rules for many years.
In order to attract investment, South Africa has introduced a headquarter regime in force as of 1 January 2011. Under this regime, a company may qualify as a “preferential holding company” provided that certain requirements are being met i.e. 10% shareholding, 80% of the tax value of the holding company must represent equity, and 50% of the receipts and accruals derived from foreign companies. South Africa aims with this regime to become a country attractive for foreign investors, mainly multinationals. The main premise of this regime is that investments originated and redeployed offshore should not attract tax in South Africa.
Companies qualifying under the preferential holding regime may freely borrow from abroad and such funds may be deployed locally or offshore once registered with the South African Reserve bank for exchange control purposes. An election needs to be made by the holding company to be a headquarter company (section 9I of the Income Tax Act75). To make
74 Explanatory Memorandum on the Taxation Laws Amendment Bill , 2013.
75 Article 1 Section 9I Income Tax Act 1962 states as follows: “(1) Any company that (a) is a resident; and (b) complies with the requirements prescribed by subsection (2), may elect in the form and manner determined by the Commissioner to be a headquarter company for a year of assessment of that company”.
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the election the company has to qualify in terms of the criteria mentioned above. The company should submit a form to notify SARS of the election. Furthermore, companies qualified under the “preferential holding regime” are required to submit annual reports to the Minister of Finance which will enable the monitoring of activities and any intended abuse.
This regime has been subject to criticism that views this regime as an “intermediary companies” regime rather than a pure headquarter holding regime.76
Companies that do not qualify under the ‘preferential holding” regime will be taxed as any other resident company. Due to this preferential regime South Africa may be used as a conduit country, and in this case, the tax authorities may resort to spontaneous exchange of information.
Another issue addressed in the South African report is whether or not a distinction exists in treatment regarding offshore undertakings that feature staff and premises to a very limited extent to a lower tax burden than otherwise applicable to local undertakings. The surveyed countries do not have these distinctions and therefore, there is no lower tax burden even if staff and premises have a limited presence. In the same direction, there is no distinction in tax treatment between companies that make no or little profits and companies that make regular profits. The only reference that was made in this case by Colombia and Uruguay is to the preferential regime of Free Trade Zones that provides for a special treatment of the companies located in such a Zone. The regulatory framework of the Free Trade Zone has been introduced by the lawmaker in Colombia77 and Uruguay. 78 Furthermore, Law 1429 of 2010 created an incentive for new SMEs whereby the corporation pays the corporate income tax progressively during the first five years (Year 1- 0%, year 2- 25%, year 3- 50%,
76 This conclusion was reached by Koeleman stating that “it would therefore appear that the legislation intended to establish an intermediary holding company regime rather than a “pure” Headquarter Regime (HQC regime).
Through this requirement, the local asset base of the HQC is restricted to less than 20% of the HQCs total assets, which would generally limit the extent of local trading. In addition, this would provide the platform for the HQC to earn the majority of its income from outside South Africa, which rather indicates the intention to establish an intermediary holding company regime over a headquarter company regime. If it was indeed the intention of the Legislature to institute a “pure” HQC regime, it is submitted that the above requirements relating to foreign assets and foreign receipts and accruals would not have found expression in the legislation; as such restrictions may be regarded as counterproductive in achieving the objective of establishing a pure HQC regime”. MK Koeleman, A critical review of the South African Headquarter Company regime in light of its stated objective of attracting foreign investment, Masters,para 5.32 (Cape Town: University of Cape Town, 2012).
77 Inter alia: Law 1004 of 2005 . I. J. Mosquera Valderrama. New Tax Framework Applies in Free Trade Zones.
Tax Notes International, The United States, Vol. 48 (2007), no. 8; pp. 745-746.
78 Inter alia: J. Bergstein, J. And M.E. Zaglio. Tax Benefits of Uruguay's Free Trade Zones, 11 Tax Notes International, 889 (2008).
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year 4- 75%, year 5- 100%) in order to compensate the lower income attributable to the start-up period in new businesses.
It is submitted that these differences in approach towards international tax arbitrage of the surveyed countries are to a certain extent depending on their tax systems but also in the attractiveness of these countries to investors in general. In some cases these differences also depend on the provisions of the tax treaties that do not prevent treaty shopping for instance the tax treaty between Colombia and Spain that only provides a beneficial ownership clause.
Therefore, it is submitted that the differences in approach cannot be reconciled since each country has their own priorities that mostly are the result of each country’s economic development and tax system.79 It is nevertheless, important that issues such as tax treaty shopping be addressed by means of for instance a treaty anti-abuse clause such as limitation on benefits but that will still need to be tailored to the technical and administrative capacity of each country’s tax administration to enforce such rule.
The report of Colombia established that the issue of tax arbitrage is only being addressed as part of the country’s participation in the BEPS initiative at the OECD.
Furthermore, the tax administration started a training program for the officials in charge of international tax audits with DeSTaT academics in order to raise awareness of the structures that achieve tax arbitrage in Colombia.
South Africa has introduced specific rules to deal with international tax arbitrage. The question is whether such rules are necessary. It is submitted that these rules are necessary
South Africa has introduced specific rules to deal with international tax arbitrage. The question is whether such rules are necessary. It is submitted that these rules are necessary